Does raising taxes and increasing spending aid economic
recovery?
By Rachel Alexander
web posted November 4, 2002
As the election approaches, many politicians are ominously
warning that the only way to revive the economy is to raise taxes,
insisting that any opponent who dares say they will not raise
taxes is being irresponsible in order to get votes, and will
eventually see the folly of their ways once elected and raise
taxes. There is also talk of the necessity of new spending, in
order to "stimulate" the economy. Yet after these declarations,
there is a deafening silence - no in-depth analysis is offered
explaining precisely how raising taxes and increasing spending
will help the economy. Why? Most politicians don't understand
macroeconomics; they fail to grasp the correlation between
cause and effect in this area. Over and over again, when an
economy eventually improves, no matter when it recovers
relative to government tinkering, liberal politicians inevitably state
that it was because of the increases in spending and taxes.
Instead of comprehensively explaining how their macroeconomic
plan will work, leaders like Tom Daschle throw around
meaningless phrases like "long term economic recovery strategy,"
and "short term economic stimulus bill," hoping that the media
and most voters will be deterred from further investigation by the
important-sounding and esoteric nature of the phrases.
Liberals like Daschle don't understand what started the recession
in the first place. It wasn't because of tax breaks or not enough
spending - it was because of government tinkering that was
trying to "fix" the economy, particularly interest rates. The
government lowered interest rates, allowing more and more
shaky investments, and when those lucrative investments started
to fail, the economy could no longer sustain them all. Of course,
what needs to happen is to let those investments fail, without
government interference, and perhaps investors will learn in the
future not to make unwise investments.
Unfortunately, the government always insists on intervening, and
instead of pointing out that maybe the investors should have been
more careful, the government starts meddling with the interest
rates once again, which only prolongs the recession, as we
learned in the 1930's. Now why would you want to lower the
interest rates again, when that was what precipitated the
inflationary credit expansion in the first place? Of course, liberals
like Daschle confuse the cause with the solution - they believe
that Roosevelt's policies in the 1930's helped end the
Depression, rather than prolong it.
Arguments that spending must be increased to stimulate the
economy are flawed. Keynesian economics, which teaches that
additional government spending will solve the problem of
overproduction when consumers aren't spending as much, is
flawed because government spending hurts long-term growth.
Pumping money into the economy to save businesses - that
probably should have gone under - does little to sustain growth
and in fact inhibits it, by taking money (in the form of new or
higher taxes) from consumers and investors who could have
been using that money to invest instead for the long term. And
taxing an activity reduces the level of that activity and destroys
incentives to work. Instead of raising taxes in order to increase
spending, why not allow people to keep their money, resulting in
more savings and investment? Regardless, where is the evidence
that government spending is more profitable for the economy
than individual saving and investment? Noticeably, Daschle
doesn't cite any studies demonstrating this. A Cato Institute study
found that every $1 increase in spending actually costs $1.40
because of compliance costs and inefficiencies in the system.
And increasing spending is what leads government into budget
crises, since spending always seems to outpace tax revenues.
Arguments for tax increases instead of tax breaks are equally
flawed. Reagan's tax cuts, which came on the heels of the
economic recession of the 1970's, resulted in the longest
peacetime expansion in the history of the U.S. They didn't
worsen the recession into a depression. Contrary to Keynesian
economics, which holds that cutting taxes increases inflation and
does little for growth, the opposite happened. Tax receipts grew
20 percent faster in the 1980's era of tax cuts than they did
during the 1990's era of tax increases. Of course, the deficit
increased under Reagan, but that was because the liberals in
Congress refused to cut spending on their pet social programs, in
return for compromising on the approval of Reagan's defense
programs, even after they had promised they would.
Next time a politician insists that it is necessary to raise taxes and
increase spending through their important sounding
"comprehensive plan for economic growth," but fails to explain
how it will actually work, be suspicious that even they do not
understand it.
Rachel Alexander (editor@intellectualconservative.com) is the
editor of Intellectual Conservative (http:
//www.intellectualconservative.com/). Resources from the
Ludwig von Mises Institute were relied upon for this article.
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